2023 (7) TMI 19 - AT - Income Tax

Deduction of provision for leave encashment / unearned leave - AO has disallowed actual payment towards leave encashment on the ground that it has credited to provision for leave encashment - It was the claim of the appellant that the reduction in the provision for leave encashment has been withdrawn from liability from the provision for leave encashment shown in the balance sheet, but instead of crediting it to the liability account, the amount has been reduced (credited) to the actual amount of leave encashment paid to the employees during the year - HELD THAT - The assessee has filed a detailed note explaining the actual payment of leave encashment and amount withdrawn from provision for leave encashment. We find that the arguments of the assessee appears to be correct, going by method of accounting followed by the assessee for claim of deduction towards payment for leave encashment and provision for leave encashment in the books of accounts. But fact remains that, facts needs to be verified from the AO. Therefore, we set aside the issue to the file of the AO and direct the AO to re-examine the claim of the assessee in light of arguments that the assessee is making provision for leave encashment in the books of accounts and adding back the same in the memo of computation of taxable income and further claiming deduction towards payment for leave encashment u/s. 43B(f) - AO is directed to verify the claim of the assessee and decide the issue in accordance with law. Appeal filed by the assessee is allowed for statistical purposes.

Issues involved:
The appeal challenges the order passed by the Commissioner of Income Tax (Appeals) regarding the disallowance of deduction for provision for leave encashment made by the appellant for the assessment year 2018-19.

Grounds of appeal:
1. The appellant contends that the order of the Commissioner of Income Tax (Appeals) is contrary to law and facts.
2. The disallowance of the deduction for provision for leave encashment is contested by the appellant.
3. The appellant argues that the excess provision for leave encashment was reversed and reduced from the actual expenditure.
4. It is claimed that the excess provision for leave encashment was reduced from the expenditure incurred by the appellant.
5. The actual amount paid for leave encashment was higher than the amount claimed under this head due to the excess provision being reduced.
6. The reduction in the claim of expenditure represented the withdrawal of provision no longer required.
7. The appellant reduced the amount in the memo of income as it did not represent income.
8. The appellant seeks leave to file additional grounds at the time of hearing.

Judgment details:
The assessee, a corporation, filed its return of income for the assessment year 2018-19, declaring total income. The Assessing Officer disallowed the deduction claimed for provision for leave encashment and determined the total income. The appellant's appeal before the first appellate authority was unsuccessful, leading to the current appeal.

The appellant argued that the deduction claimed was not a provision but actual payment, which was credited incorrectly. The issue was whether the deduction was for provision or actual payment.

After hearing both parties and examining the records, it was found that the reduction in the provision for leave encashment was withdrawn from liability but credited to the actual amount of leave encashment paid. The appellant's method of accounting for the deduction appeared correct. However, further verification by the Assessing Officer was deemed necessary.

Therefore, the issue was set aside to the Assessing Officer to re-examine the claim of the appellant and decide in accordance with the law. The appeal by the assessee was allowed for statistical purposes.

The judgment was pronounced in Chennai on 28th June, 2023.

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